Health care costs continue to grow quickly in the U.S., but the value of this spending is uncertain. Fragmentation and misaligned financial incentives among physicians and between hospitals and physicians inhibit value-based decision-making. In service areas such as cardiology and orthopedic surgery, physicians determine the use of high cost drugs and devices known as "physician preference items," but hospitals pay for them. Some payers and providers have adopted group-based incentive programs to improve alignment. One known as gainsharing is currently used by hospitals in the private sector as well as within Centers for Medicare and Medicaid demonstration programs. Under gainsharing, a physician groups receives a payment that must be equally shared among its members if costs are lowered relative to a historical baseline. The broad objective of this project is to increase the value of health care decision-making through improved design of physician incentive programs. In preliminary work, we found that the programs implemented before the end of 2006 reduced costs without reductions in the available measures of quality or access. A completed theoretical model provides insights to how hospitals and physicians make decisions under gainsharing's incentives. The proposed work builds off these results to achieve three specific aims: 1) to determine whether gainsharing reduces utilization and hospitals'prices of drugs and devices, and how any price reductions are achieved;2) to determine whether gainsharing promotes coordination and standardization of physicians'treatment decisions;3) to demonstrate how physicians vary in their responses to gainsharing. The project also includes one exploratory aim: to develop and test economic models that accurately predict physicians'responses to alternative incentive programs, including differently designed gainsharing programs. To achieve these goals, we propose to examine all of the private-sector gainsharing programs in cardiology implemented before the end of 2009. This covers up to 25 gainsharing programs at 13 hospitals, with six programs currently pending government approval. We rely on a rich, proprietary dataset from 2001-2009 that includes all of these gainsharing programs as well as contemporaneous data from approximately 130 other, non-gainsharing coronary catheterization laboratories. These data include detailed information about every drug and device chosen by every physician for every patient, including the price the hospital paid for them. They also include a more detailed set of risk-adjustment variables than available in administrative data. The project has three main steps: we determine how physicians responded to gainsharing by empirically testing the hypotheses from the theoretical model;we discover why physicians'responses to gainsharing varied by extending and testing the model;and we quantify how physicians weigh each aspect of the incentive program by developing a structural model. The results can provide timely insights to regulators, policymakers, and managers as they consider various incentive programs to promote value through coordination.